Leotard, 75, was questioned on July 4 over suspected "complicity in abuse of social assets," the source said, confirming a report in Canard Enchaine, the satirical and political news weekly.
Leotard becomes the second former minister to be placed under formal investigation, a status roughly equivalent to being indicted, after ex-premier Edouard Balladur.
The probe centres on a web of corruption behind the 1994 sale of submarines to Pakistan and frigates to Saudi Arabia, with suspicions that kickbacks went to fund Balladur's presidential bid in 1995.
Magistrates are also probing whether a 2002 Karachi bombing that killed 11 French engineers was revenge for the cancellation of bribes secretly promised to Pakistani officials.